From corporates investing in Asia to small and medium enterprise (SME) suppliers wanting to make sure they get paid, companies are trying to discern whether countries and counterparties in Asia are actually risky. Experts at this month’s Coface Country Risk 2017 event in Singapore provided their insights.
The macroeconomic perspective.
On a global basis, Coface Group CEO Xavier Durand said that “our view of the world economy is positive. The US economy continues to show positive signs, we are more bullish on Europe, emerging markets have stabilised.” Yet, he noted, there are still significant risks due to factors such as a structural imbalance between demand for oil and the ability to produce it, continued political risks in Europe, rising tensions and conflict in the Middle East, and a massive accumulation of debt. Of perhaps greater concern, he said, are two categories of risks that are hard to control: natural disasters and human governance.
Focusing more specifically on Asia, Standard Chartered Bank chief economist for Asia David Mann said that the region is responsible for 60% of global growth, even with a slower China. “It’s all about momentum, scale and velocity. China is indisputably the largest growth driver. ASEAN-plus-South Asia as a single entity is the second largest driver of global growth.” Within those areas, though, there are divergences. Growth in India will go up towards 8%, he believes, while the Philippines is growing faster than before, and Vietnam is growing due to foreign direct investment.
That said, Mann opined that “the first half of 2017 is as good as it gets. We expect to see easing off in the growth rates.” While megaprojects in Thailand and a surge in investment spending in the Philippines may help growth, overburdened households in Thailand as well as Malaysia present risks and China will remain critical.
Asked whether markets are too complacent about China, Mann said that people know there are more problems to come. “We don’t know how bad debt is. The biggest difference is the concentration of debt to state-owned enterprises.” He is even more worried about technology taking away opportunities from low-cost markets, saying “that could be a bigger problem and force more protectionism.”
Moody’s Investors Service associate managing director, Marie Diron, said she expects Asia to benefit from a positive global environment. “We have more Asia Pacific sovereigns with more economic capacity, and some of the risks of that economic strength have diminished.” That said, debt has increased, and she does not see government debt falling. Debt levels are higher than they would have been in previous cycles, which raises questions about fiscal flexibility.
What especially concerns her, Diron said, is frontier markets such as Mongolia, Sri Lanka, Vietnam and Cambodia. “We’ve seen a decoupling, with debt servicing costs for advanced economies at about 5%, costs for emerging markets at 7% and costs for frontier markets at 9%.” And even though debt is on the corporates’ balance sheet and not on the government’s balance sheet in China, contingent liability and sharp increase in credit intensity come with higher risk.
“The optimism for the Chinese economy is unwarranted. Growth will taper to 6 % 2020”
Coface economist for the Asia Pacific, Carlos Casanova, similarly said the outlook in Asia remains stable. “We remain cautiously optimistic in the region. Indicators have improved significantly, FX reserves improved in 2016, current account surpluses have become the norm for the region, (and) many countries run a trade surplus.”
Taking a more pessimistic stance towards China, however, Casanova said that “the optimism for the Chinese economy is unwarranted. Growth will taper to 6 % 2020. They engineered a pickup in metal prices. Total social financing has overshot the target by a lot. That is fuelling an unhealthy corporate debt bubble, at 160% of global domestic product (GDP).” The implications, he said, include nonperforming loans in banks and a higher cost of debt servicing. “The only two ways forward are to maintain an acceptable level of growth, or allow more defaults. The bottom line is that the only way to escape is to forge ahead with structural reforms, which will lead to a rise in defaults. Defaults increased in in 2016 and 2017, and we expect the pace to pick up.”
Additionally, he noted that countries with the largest household debt – Indonesia, Malaysia, Korea, China, Australia, and Korea – will consume less. “Investors have become complacent,” Casanova said. “An extension of policy intervention has interfered with traditional warning mechanism. A black swan will be felt more strongly.”
The year ahead
So, is Asia risky? Yes, and no. While the outlook for the region is positive, there are vast difference between countries rather than looking at the region as a single entity, corporates should look at each market separately rather than simply painting all of Asia with the same broad brush.